Consider These Four Things Before Bailing Out Your Adult Children
Financially Supporting Your Kids May Negatively Impact Your Own Financial Health
Are you considering financial support for your adult children? If so, you’re not alone. In a recent study by TD Ameritrade, 25 percent of baby boomers admitted they are supporting adult family members. That support, on average, equates to $10,000 per year. That’s a full $10,000 that boomers aren’t able to save or invest for their retirements – annually.
When it comes to your retirement planning, it’s important to ask yourself whether you can truly afford that kind of generosity. After all, if you fall short of your retirement goals, will anyone be there to bail you out? More than likely, the answer is no.
So, before you agree to provide financial support (or further financial support) to your adult children, you should ask yourself four questions:
Is the money for a specific purpose?
Specificity is key when you’re considering writing a check. While you may be inclined to protect your child’s feelings and save them the potential embarrassment of explaining details of their financial misfortune, you have a right to know whether they need money due to an unforeseen event outside of their control, or simply because they are making poor decisions with their money. If the latter is true, think long and hard about whether you’re throwing your hard-earned money away.
Although asking questions can be uncomfortable, it’s usually possible to get to the root of the problem in a tactful manner.
What is the true cost to my future?
Many parents are helping their children with monthly bills indirectly – letting their children remain on their cell phone plan or using their Netflix subscription. While it might seem like forty bucks each month is innocuous, it’s important that you take all of these costs into consideration in total so that you have a full understanding of how this support may be impacting your own financial future.
If you’re helping your children on a larger scale, such as making monthly student loan payments on their behalf, consider how long you can truly afford to do this without jeopardizing your own retirement planning.
There’s nothing wrong with helping your children, but you may want to consider imposing time limits on your financial assistance. For instance, tell your children they can remain on the family cell phone plan free of charge until age 25, then they will be expected to pay for their own plan.
When you’re considering whether to continue financial assistance to an adult child, it may be helpful to keep a spreadsheet that details each dollar. This allows you both to see how much these expenses accumulate over time and to factor that into your decision-making.
Are there terms in place?
If you’re acting as a bank for your children, it makes sense that you should set clear terms for the money you are providing. Banks do not loan money for an indefinite amount of time, they do not provide loans interest-free and they always expect prompt repayment.
Although this can be another uncomfortable conversation to have, it’s essential that you discuss your terms openly and put them in writing. Your children undoubtedly appreciate your generosity, but you need to set the expectation that it is not open-ended. As a parent, you have likely made a great many sacrifices for your children, but your long-term financial security should not be one of them.
Is there another way I can help?
Whether or not you decide to offer direct financial assistance, your adult children may benefit from financial literacy information and training. Unfortunately, the vast majority of schools don’t teach this important life skill, and it sets us up for failure as adults.
If you think a knowledge gap is at the heart of your child’s financial struggles, offer to help them better understand their finances and balance their monthly budget. If they’re unemployed or underemployed, consider whether you have professional connections that might lead to more career success. If they need to purchase a car on a limited budget, use your experience to help them negotiate a lease they can afford on their own. In truth, there are innumerable ways you can provide financial assistance to your children without actually giving them money.
Whether you are considering financial assistance for an adult child for the first time, or you’re determining whether to continue existing assistance, asking yourself these four questions should illuminate the situation and ensure you are protecting your own financial future.